The Ingham Analytics Weekly Letter on Sunday - 9 August 2020
Welcome to another Ingham Analytics Sunday Weekly, highlighting pertinent local and international financial newsflow, recent notes that we have published, and what has been among some of the most read notes in the past few weeks or months.
This week we issued a note entitled "Bedazzled" (4 August) - as the name suggests there is jewellery connotation, in this case, gold. This note has a common thread with "Forever blowing bubbles..." (28 July) and "Tech and the Treasury 10s" (22 July).
What we've observed this year is the phenomenon of a rising gold price in tandem with rising Tech share prices - gold has outdone the Nasdaq Composite Index by increasing by over 30% year-to-date compared to 23% for the Tech heavy index. The MSCI World Index by contrast is down, real estate even more so.
The other phenomenon is that gold is rising at the same time as the 10-year Treasury rate is falling (or conversely the price of the bond falling). Typically, when equity markets go up bond prices decline, and yields rise - which is not happening during the COVID-19 pandemic world and with it a steep economic decline of varying magnitudes accompanied by bankruptcies. A benign start to 2020, with next to no sign of economic or financial distress, from March turned into a policy-induced economic nose-dive.
The point we made is that over at least fifteen years gold exhibits a strong positive correlation with Treasuries. Gold and 10-year Treasuries have a high correlation of 0.875 during this period. The US 10-year rate is the most important as a benchmark for quantifying a hurdle rate for capital projects and asset allocation decisions for portfolio managers.
Below is a graph showing the inverse relationship between the percentage growth on the gold price (blue line) and the percentage decline in the 10-year Treasury yield since the start of the year. At the beginning of January an ounce of gold cost just over $1,500 whilst the yield on a 10-year Treasury was 1.9%. As of Friday, gold cost $2,046, getting to above $2,080 on Thursday, whilst the 10-year Treasury yielded 0.56%, having been down to 0.51% on Thursday.
The gold price is rising at the same time as Treasury interest rates are falling. However, we cautioned that 10-year Treasury acts as a better hedge asset with less volatility than gold and that both gold and long silver positions are crowded trades with speculative elements in a zero-cost money environment, spurred by central bank priming. Both gold and silver are topping out just as precious metals share prices have lately been taking off.
Below is a graph of Sibanye-Stillwater (grey), DRD (purple) and Harmony (yellow). Sibanye-Stillwater lags because platinum group metals today are the largest source of profitability and resources.
US earnings season is showing up both pleasant and less pleasant surprises.
What we do notice is that real estate investment trusts (REITs) listed in the US that have a diversified range of tenants and sub-categories of property are holding up better than may be expected. With JSE listed REITs having been clobbered and with dim prospects we advise carefully considered exposure to overseas REITs for yield, particularly to those with a larger logistics presence.
An example is Global Net Lease (listed on the NYSE) which has just reported good Q2 results with high levels of rent collection. This company too has assets across the US and Europe, top notch tenants, almost 9 years weighted average remaining lease term, a mix of office and industrial/distribution with hardly any retail remaining. Proactive recycling of capital is a thing we also look for with purchases realising attractive capitalisation rates.
In the oil patch, unlike European oil majors Shell and BP, ExxonMobil has been quite resilient and is on track to exceed their capital and cash operating reduction targets - moreover, the quarterly cash dividend of $0.87 per share is unchanged and the Board has publicly committed to maintaining the dividend. Meantime, BP has halved its dividend and will keep it that level whilst Shell cut its first-quarter dividend 66% to $0.16 per share.
For investors who have an interest in maintaining some exposure to oil, which has been on a rising trend this week with Brent ending just below $45/bbl, ExxonMobil to us is the best of the majors and will yield a gross 8% at the current share price of $43.
On the topic of energy, our notes on Sasol are popular downloads and the latest "Going, going for a song" (5 August) is no exception.
Such is the weakness of Sasol's forced seller situation that it has negotiated to sell sixteen air separation units for a song to Air Liquide. The replacement value of all its ASU's at Secunda is 4-5x that which it is selling these units for, we calculate. The $500m contribution to the $6bn it says it needs to raise is negligible and this makes the risk of an equity raise ever more likely - if you didn't follow your rights in a $2bn issue of new shares for cash you'd be diluted by approximately 33%.
Whilst Sasol closed just above R150 per share on Friday we do not see the recent lift in oil (combined with a weak rand) as sufficient reasons to merit buying the share - as would have typically been a motivation in a normalised situation.
On the mining front, Glencore reported a loss for the first half of the year and scrapped its $2.6bn dividend - contrary to earlier indications. Adjusted EBITDA fell to $4.83bn from $5.58bn. The 13% decline isn't too bad but Trading operations were the mainstay, contributing earnings of $2bn - with oil the big one at $1.27bn because of volatility in that market. But in capitalising on trading opportunities the company increased its debt, making debt reduction a priority. For us, BHP remains our preferred pick in mining for now - so long as there is bounce in iron ore and in steel demand out of China then at spot prices there is still some juice to squeeze out of BHP.
Below is a price chart of 62% Fe iron ore. Notes on mining, including BHP and Kumba, are available on our website.
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